Contracting with externalities

The paper studies contracting between one principal and N agents in the pre sence of multilateral externalities. When the principal commits to publicly observed bilateral contracts, inefficiencies arise due to the externalitie s on agents' reservation utilities. In contrast, when the principal's offer s are privately observed, inefficiencies are due to the externalities at ef ficient outcomes. When the principal can condition her trade with each agen t on others' messages, she implements an efficient outcome, while threateni ng deviators with the harshest possible punishment. However, in the presenc e of noise that goes to zero more slowly than N goes to infinity, asymptoti cally agents become nonpivotal, and inefficiency obtains.